The £21.3bn Greater Manchester Pension Fund is in the latter stages of concluding a series of impact investment deals, worth about £100m, which will build roughly 2,000 local homes.
While still something of a niche investment style, impact investing has seen significant growth worldwide over the past year; 208 respondents to the Global Impact Investing Network’s 2017 survey now manage $114bn (£86.8bn) in impact assets.
The GMPF has allocated circa £1.1bn in total towards local infrastructure and impact investments. The scheme maintains a £750m Greater Manchester Property Venture Fund.
It places the remainder of its impact investment capital in its Impact Portfolio, and in the Invest 4 Growth initiative, where it invests alongside five other Local Government Pension Scheme funds as part of the Local Authority Pension Fund Forum. The combined value of these investments stands at £300m.
Some of these investments would actually be great diversifiers of equity risk, and they would be great secure income generators
Karen Shackleton, Resonance
The scheme has further ambitions in local investment. It recently lifted its threshold on local impact investment, which capped spending to no more than 3 per cent of fund value, to 5 per cent.
Debt investment has fewer governance hurdles
GMPF makes extensive use of debt to support local infrastructure investment. It granted a £4m loan to housing developer Urban Splash, which subsequently built 44 new family homes.
Rowlinson Construction is currently using an £8m loan facility from the GMPVF to build 164 flats. All of the fund’s investments to date have made a profit, and aim to encourage regeneration in the area.
Paddy Dowdall, assistant executive director at the GMPF, said there were fewer governance requirements associated with debt investment compared with equity.
“You get paid less for debt investments but there’s lower risk,” he said. “It’s also easier from a governance perspective, so you can achieve more scale.”
Dowdall said there were currently a number of housing loan projects on the scheme’s investment horizon. The fund’s annual report indicates that beyond infrastructure, the fund has issued loans to SMEs, with a focus on creative media, high technology, healthcare and business services.
SRI can help schemes diversify their portfolios
The GMPF is one of many LGPS members balancing its commitments to meeting its funding objectives with its aspirations in socially responsible investment.
Karen Shackleton, non-executive director at impact investment company Resonance and head of campaign group Pensions for Purpose, said fund managers are responding to a growing demand for impact investment with sophisticated fund offerings.
“There is a recognition from the fund managers that they need to structure their impact funds in such a way that the risk/return characteristics of the investments can compete with the commercial alternatives,” she said.
“The impact managers are becoming quite innovative in terms of the structure of funds,” Shackleton added. Schemes will have to, in certain cases, surrender liquidity in order to achieve impact and return objectives.
Impact funds may include an allocation to social housing investment, complemented by a more commercial residential allocation. This can provide attractive diversified returns, according to Shackleton.
“What you’ve got to think about is how that investment sits in the whole investment portfolio. Some of these investments would actually be great diversifiers of equity risk, and they would be great secure income generators.”
While impact investment can provide diversifying benefits, Shackleton cautioned against excessive scheme exposure to one local area.
Members benefit from ESG alongside returns
The GMPF’s allocations recognise a duty as an LGPS member to invest with the needs of the local authority and local taxpayers in mind.
Luke Hildyard, the Pension and Lifetime Savings Association’s policy lead on stewardship and governance, said policymakers are interested in getting LGPS funds to invest in local housing. He was encouraged by the GMPF’s impact investment strategy.
“I think it does reflect the holistic interest of the underlying beneficiaries that pension funds ought to consider,” he said.
Members hold stakes both in the financial performance of their scheme, and the positive impact it can have on their area, according to Hildyard.
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“Of course, they want to achieve a healthy return on their investment,” he said. “But also, they want to retire into a thriving and prosperous community.”
Private sector schemes, while also engaged with socially responsible investment, invariably find it harder to calculate such indirect benefits, according to Hildyard.
“Incorporating ESG into investment strategies is now just part and parcel of many schemes’ work, and there is this growing interest in social investment in things like housing and infrastructure,” he said.
